21 March 2013 21:43 [Source: ICIS news]
HOUSTON (ICIS)--Casting a long glance forward upon the global supply of urea, Dutch financial service provider Rabobank on Thursday predicted that the market is set to enter an era of oversupply within the next decade.
In a report authored by Rabobank’s Food & Agribusiness Research and Advisory group, the bank states that with the unprecedented acceleration in capacity expansion by importer nations such as the US and Brazil, and low cost producers in the Middle East and Africa, there will be change in the fundamentals of supply and demand of the vital crop nutrient.
The anticipated expansion is expected to improve the sufficiency of importers and would ensure that the increased levels of production will allow supply stockpiles to build and far outweigh the growth of demand. Rabobank states that if that scenario holds true, the market would transform itself over the next decade to eventually become primarily a buyers’ paradise.
“Attractive returns in urea production have resulted in a spurt in capacity expansion projects since 2007. The expansion is driven mainly by the exploitation of shale gas in the United States, new gas fields in Brazil, political incentives in India and low-cost natural gas in the Middle East and Africa,” said Rakhi Sehrawat, Rabobank analyst.
“Over 65 new projects have been announced that will expand global urea capacity by 30% between now and 2020. This rush of activity on the supply side will have a strong influence on the urea demand and supply picture in the coming five to 10 years," he said.
Sehrawat said that the additional supply will impact participants across the board but especially high-cost producers and traders. As the reliance on main urea destinations declines and lower cost exports grow, competition amongst the traditional sources and exporters will increase, he said. This will pressure prices and change capacity strategies, forcing producers and traders alike to adapt to the new fundamentals of the urea market, he said.
“For high-cost producers, it means they would need to strengthen their market position through cross-industry partnerships and downstream integration closer to farmers,” Sehrawat said.
“The winners will be those who can achieve low costs of production or are placed close to a demand market enabling them to quickly respond to demand dynamics by altering production cycles," he said. "Market intelligence and access to growers will be key success factors in this case.”
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